Westlake Corp (WLK) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Westlake Chemical Corporation Fourth Quarter 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

As a reminder, ladies and gentlemen, this conference is being recorded today, February 20th, 2007. I would now like to turn the call over to today's host, Steve Bender, Westlake's Vice President and Treasurer. Sir, you may begin.

Good morning, everyone. Thank you for joining us for the Westlake Chemical Corporation Fourth Quarter Conference Call. I am joined today by Albert Chao, our President and CEO and Danny Gibbons, our Senior Vice President and Chief Financial Officer, and other members of our management team.

The agenda for today will be as follows. Albert will first make a few comments regarding Westlake's performance during the fourth quarter, Danny will then provide you with a more detailed look at our financial and operating results. Albert will conclude with a discussion of recent developments, and then we will open up the call to questions.

Today, management is going to discuss certain topics that will contain forward-looking information that is based on management's beliefs, as well as assumptions made by and information currently available to management. These forward-looking statements suggest predictions or expectations and thus, are subject to risks or uncertainties.

Actual results could differ materially based upon factors including the cyclical nature of the chemical industry, availability, costs and volatility of raw materials and utilities, governmental regulatory actions and political unrest, global economic conditions, industry operating rates and the supply demand balance for Westlake's products, competitive products and pricing pressures, access to capital markets, technological developments and other risk factors.

Westlake issued, earlier this morning, a press release with details of our quarterly financial and operating results. This document is available in the press release section of our web page at www.WestlakeChemical.com.

A replay of today's call will be available beginning one hour after completion of this call until 1 p.m. Eastern Time on February 27th 2007. The replay may be accessed by dialing the following numbers. Domestic callers shall dial 1-888-286-8010. International callers may access the replay at 617-801-6888. The access code for both numbers is 14463440.

Please note that the information reported in this call speaks only as of today, February 20, 2007 and therefore, you're advised that time sensitive information may no longer be accurate as of the time of any replay. I would finally advise you that this conference call is being broadcast live through our Internet webcast system that can be accessed through our web page at www.westlakechemical.com.

I would now like to turn the call over to Albert Chao.

Thank you, Steve. Good morning, ladies and gentlemen, and thank you for joining us. I'm pleased to report a strong year in spite of the difficulties we experienced in the fourth quarter. In this morning's press release we reported fourth quarter earnings of $0.22 per diluted share, which is down significantly from our earnings reported over the last several quarters.

We reported earnings of $2.98 per diluted share for the full year of 2006, down from the $3.48 per diluted share reported in 2005. Even though 2006 earnings was below 2005, it was still the best -- second best year in our 20-year history. We reported sales revenue of $2.5 billion, the best in the company's history, reflecting revenue gains across all segments of our business.

Through the first three quarters of 2006 it looked like it was going to be another record year, then beginning October we saw downward pressure on all of our major products, due to several factors. Many US ethylene plants that were down for planned and unplanned outages during 2006 came back online in the third quarter. At the same time, the demand was already weakening.

As a result, ethylene operating rates for the industry declined. Falling energy prices compounded the problem as customers held back on purchases anticipating lower prices. In addition, excess product stockpiled by downstream buyers in anticipation of hurricanes that never materialized led to destocking of inventories. These problems, along with softness in the construction and housing industries and normal seasonal slow downs, particularly in the vinyls business during the winter months led to severe price and volume reductions.

After the significant margin erosion, in both the olefins and vinyl sectors and markedly reduced volumes for vinyls experience in the fourth quarter, the industry is already seeing signs of improvement, at least from a volume standpoint.

Now, to switch subjects. I'm happy to report that on November 30th, we completed our previously announced acquisition of Eastman Chemical Company's Longview, Texas polyethylene business and ethylene pipeline, which now brings our total polyethylene capacity to over 2.5 billion pounds per year, and adds significantly to our integration strategy.

We are now positioned as the number three producer of low-density polyethylene in North America with a capacity of over 1.5 billion pounds. Although I will be talking more about this later, we remain cautiously optimistic about the strength of the US economy and thus the prospects for our businesses in 2007.

Now, I would like to turn the call over to Danny for review of our fourth quarter and annual results.

Thank you, Albert, and good morning, everyone. As we reported in this morning's press release, Westlake had sales of $524 million in the fourth quarter of 2006, which represents an 18% decrease from the $636 million reported in the fourth quarter of 2005. This decrease was due to lower selling prices across the board for all of our major products and reduced sales volumes for both PVC resin and pipe.

The one positive was that polyethylene sales volumes were stronger in the fourth quarter, mostly because of strong export demand, plus we had the additional benefit of our Longview polyethylene assets for the month of December. Conversely, during the fourth quarter of 2005, our polyethylene sales volumes were negatively impacted by a two-week outage, resulting from hurricane Rita.

For the quarter, net income was $14 million, or $0.22 per share, compared with net income of $74 million or $1.13 per share in the fourth quarter of 2005. The decrease is primarily the result of lower average selling prices, reduced sales volumes and the adverse impact of the unscheduled outage at one of our ethylene units in Lake Charles, Louisiana. The unscheduled outage and maintenance turnaround of one of our ethylene units in Lake Charles, resulted in substantial maintenance expense and unabsorbed fixed cost as well as lost opportunity.

Our initial estimate of the negative effect on operating income of the shut down was in the range of $25 million to $30 million, resulting from lost productions and maintenance costs. We now believe the impact of the outage is approximately $40 million, of which $10 million of the impact fell into the third quarter, with the remaining $30 million portion in the fourth quarter results. In addition, ethylene and ethylene derivatives experienced significant downward pressure in the fourth quarter, as Albert previously mentioned.

As a result, spot ethylene and polyethylene prices fell between $0.13 and $0.15 per pound during the quarter. Both PVC resin and pipe selling prices and volumes fell dramatically in the fourth quarter, due to the continued softness in the construction and housing industry, which began earlier in the year, normal seasonal weakness and the destocking of inventory by PVC converters anticipating lower prices. The lower sales volumes in our vinyl segment also led to lower operating rates and higher unabsorbed costs.

The fourth quarter results were also negatively impacted by the utilization of the first in, first out or FIFO method of inventory accounting, as compared to utilizing the last in, first out or LIFO method used by some companies in our industry. The negative impact resulted from falling feedstock prices during the quarter. Conversely, feedstock prices rose sharply in the fourth quarter of 2005, due to the impact of hurricanes Katrina and Rita, which provided a FIFO benefit.

We estimate that the negative FIFO impact on the fourth quarter of 2006 was approximately $10 million after tax, or $0.15 per share, as compared to a FIFO benefit in the fourth quarter of 2005 of approximately $8 million after tax, or $0.12 per diluted share. The 2006 full year impact from FIFO was approximately a negative $19 million after tax, or $0.29 per share. This compares to a $17 million after tax benefit, or $0.27 per share in 2005. Therefore, the total variance between years is a negative $0.56 per diluted share.

Please bear in mind that the FIFO calculation is only an estimate, is not audited and is not a generally accepted accounting principles calculation. The fourth quarter of 2005 was one of the best in the company's history, due to the product price spikes and increased margins that occurred as a result of hurricanes Katrina and Rita. The fourth quarter 2006 were favorably impacted by some non-recurring items.

We had a tax benefit which increased net income by $6.5 million, or $0.10 per share. The tax benefit resulted from the reversal of various tax accruals, due to the resolution of certain tax matters. The fourth quarter results also benefited from the settlement of two legal disputes, and a settlement offer related to certain environmental contingencies, which resulted in the reversal of contingent reserves and favorable settlements, totaling $3 million after tax or $0.05 per diluted share.

Finally, the fourth quarter of 2006 also benefited from a lower effective rate for the year than we had previously estimated. The following is a sequential discussion of our operating results for the fourth quarter versus third quarter 2006. Fourth quarter sales were [22%] lower than the $672 million reported in the third quarter.

This decrease was primarily due to lower selling prices for all of our major products and lower sales volumes for PVC resin and pipe. These reductions were partially offset by higher polyethylene sales volumes, which resulted primarily from higher export sales, and the new volumes attribute -- available for sale from our new Longview polyethylene assets.

To complete the sequential discussion, net income decreased $48 million, or $0.73 per share, from the $62 million or $0.95 per share reported in the third quarter. Lower earnings resulted from lower selling prices, lower PVC resin and pipe sales volumes, and the adverse impact of the unscheduled ethylene outage in Lake Charles. The reduced sales volumes for PVC resin and pipe also resulted in lower operating rates in our vinyl segment and higher unabsorbed costs. These results were partially offset by lower feedstock costs.

As Albert mentioned earlier, 2006 was the second most profitable year in Westlake's history, with both segments reporting strong earnings in spite of a weak fourth quarter. We had $195 million in net income, or $2.98 per diluted share on net sales of $2.5 billion, which included an after tax charge of $16.3 million, or $0.25 per share related to debt retirement costs incurred in the first quarter of 2006.

For 2005 net income was $227 million, or $3.48 per diluted share on net sales of $2.4 billion. Results in 2006 were negatively impacted by lower production volumes and higher maintenance expense due to a maintenance turnaround at our facility in Calvert City, Kentucky and the unscheduled outage at one of the ethylene units in Lake Charles.

Additionally, 2006 PVC pipe sales volumes were lower than 2005 due to weakness in the construction and housing industry and customer destocking that occurred in the fourth quarter. These reductions were partially offset by higher average sales prices for the company's major products.

PVC resin sales volumes increased due to the supply of additional volumes from our Geismar Facility, and polyethylene sales volumes increased, due in part to the acquisition of the Longview polyethylene assets completed at the end of November. Earnings for 2006 also benefited from, one, improved feedstock commodity trading gains of $18.6 million, as compared to a loss of $3.8 million in 2005. Two, lower interest expense resulting from lower interest rates, due to the refinancing completed in the first quarter of this year, and three, higher interest income.

In addition, earnings for 2006 benefited from the various tax adjustments previously described in our fourth quarter comparison and adjustments of $3.7 million made in the third quarter of 2006, to further refine the estimate of deferred income taxes and the extraterritorial exclusion income benefit. The sum of these various tax benefits increased net income by $10.2 million, or $0.16 per diluted share in 2006.

Now, turning to our segment analysis. Our olefin segment generated a loss from operations of $3 million in the fourth quarter of 2006, compared to earning $56 million in the fourth quarter, last year. Results were significantly reduced due to lower selling prices for ethylene and polyethylene, lower ethylene sales volumes, and the adverse impact of the unscheduled outage and maintenance turnaround in one of our ethylene units in Lake Charles.

Merchant ethylene sales volumes were lower in the fourth quarter, as compared to the fourth quarter of 2005, due to an increase in internal ethylene consumption in our Geismar vinyl facility. These reductions were partially offset by lower feedstock costs and higher polyethylene sales volumes, which resulted primarily from increased export sales and from our Longview polyethylene assets.

Fourth quarter income from operations from olefins was $44 million, lower than the $42 million reported in the third quarter of 2006. This decrease was due to lower selling prices for all of our major olefins products, lower ethylene sales volumes and the unscheduled ethylene unit outage. These reductions were partially offset by a lower feedstock cost and higher polyethylene sales volumes.

Our olefin segment earned $161 million from operations during 2006, down from the $196 million earned in 2005. This decrease was primarily due to the adverse impact on 2006 of the unscheduled unit outage, and the very positive effects in 2005 of the two hurricanes that hit the US gulf coast, resulting in record earnings in the fourth quarter of 2005. The olefins segment did benefit in 2006 from generally higher selling prices, which outpaced higher feedstock costs, and from feedstock commodity trading gains in 2006 as compared to a loss in 2005.

Turning to the vinyls segment, income from operation for our vinyl segment was $10 million in the fourth quarter, compared to $58 million in the fourth quarter of 2005. The $48 million decrease was primarily due to lower selling prices and sales volumes for both PVC resin and pipe. Weakness in the construction and housing industry, falling energy prices and normal seasonal slow downs led to destocking of inventory by PVC converters anticipating lower prices.

The lower sales volumes also resulted in lower operating rates and higher unabsorbed costs. These decreases were partially offset by lower raw material costs of propane and ethylene. Fourth quarter income from operations for the vinyls segment decreased by $39 million, from the $49 million reported in the third quarter of 2006. This decrease was due to lower selling prices and lower sales volumes for PVC resin and pipe as described above. These reductions were partially offset by lower raw material costs of propane and ethylene.

Our vinyls segment earned $158 million in income from operations during 2006 compared to $179 million in 2005. This decrease was primarily due to lower production volumes and higher maintenance expenses, related to the planned maintenance turnaround at our Calvert City facility that occurred in 2006, higher raw material costs, and a significant reduction in demand for PVC resin and pipe in the fourth quarter of 2006.

Selling prices and sales volumes for PVC resin and PVC pipe fell sharply in the fourth quarter of 2006, resulting in lower operating rates, lower profit margins and higher unabsorbed costs. Now, turning to the summarized statement of cash flow and to the balance sheet. Cash flow from operating activities was $237 million for 2006, compared to $318 earned for 2005.

We spent $136 million for capital expenditures and $4.6 million to increase our interest in Huasu, our joint venture in China. We used cash from operations and available cash on hand to purchase the Longview polyethylene assets for $236 million, which included approximately $80 million in working capital. We also used $28 million to settle derivative transactions, most of which were entered into in 2005 but finally settled in 2006.

Our cash and short-term investments were $53 million at December 31, 2006, down $250 million since September 30th, which was mostly attributable to the acquisition of the Longview polyethylene assets. For 2006, we made a significant investment in the future of our business by enhancing our investment -- integration strategy. We did this without increasing leverage and maintained our strong balance sheet. Our total long-term debt at December 31st was $260 million, and our debt to total capitalization ratio stood at 18%.

Now, I'll turn the call back over to Albert.

Thanks, Danny. First let me discuss the ethylene outage effects on our company. As Danny mentioned earlier, we now estimate that a total impact of Westlake from the ethylene outage was approximately $40 million, as compared to the $25 million to $30 million that we had previously reported. The primary reason for increasing estimate was due to the expectedly severe drop in both ethylene and ethylene derivative prices in the fourth quarter.

We had purchased ethylene when the market prices were high in order to maintain production in our facilities during the ethylene outage. The prices realized from the sales of these products was simply much less than we had expected. Now, let me update you on the status of the upcoming turnaround activity and debottlenecking projects that will allow us to continue to upgrade our competing advantages.

We had planned to perform a turnaround of one of our ethylene units early in the second quarter to complete installation and remaining [tie ins] of the feed-flex project that will allow us to begin [cranking light NAFTA] when market conditions warrant. The outage is expected to last approximately 45 days and result in unabsorbed fixed costs and lost opportunity in a range of $20 million to $30 million, depending on ethylene profit margins at that time. We believe the feed stock flexibility project will improve our cycle average margins and reduce overall volatility.

We're also planning a maintenance turnaround at our styrene plant in Lake Charles later in the year. The outage will last approximately 35 days, and will include a project to revamp the styrene plant and enhance its energy efficiency. As I mentioned earlier, we have completed our acquisition of Eastman's polyethylene assets in Longview, Texas. The acquisition has moved Westlake from being a net seller of ethylene to a net buyer, and will allow us, in the future, to more fully optimize our ethylene capacity. 2007 will be a challenging year for us, as we integrate Longview assets and technologies with our own, and look for ways to maximize the synergies.

Now, let me discuss our activities in Trinidad. We continue to work with the government of the Republic of Trinidad and Tobago to develop a feasibility study for a feedstock advantage ethane based ethylene and polyethylene projects. We have made good progress, and expect to have a definitive decision as to the project's feasibility later this year. Once we complete the feasibility study and finalize project agreements, we can begin work on our project financing arrangements. Once that is complete, construction can begin.

Let me move on to discuss capital expenditures. Our capital expenditure plan for 2007 is expected to be in the range of $150 million to $175 million, which is in the same range as our last year's budget. Some of this spending, the carry over from 2006 as last year's spending was only $136 million.

We will complete a feed-flex and styrene revamp project previously discussed, and spend the rest on maintenance, safety, environmental, energy efficiency and debottlenecking projects. We'll continue to invest in the technology businesses and markets that give us an edge while keeping our costs under control.

Finally, let's talk about the outlook for the industry. As I mentioned earlier, beginning in the fourth quarter of last year, ethylene and ethylene derivative products begin losing both price and margin, which led to a poor fourth quarter. We also experienced significantly lower sales volumes in both PVC resin and pipe as our customers destocked their inventories.

As reported by CMAI, an industry consulting firm, there are some signs of improvements on all fronts. First of all, spot ethylene prices which bottomed out in November, have moved up and ethylene supplies tightened up in February due to ethylene outages both planned and unplanned.

Industry sales volumes of polyethylene remained strong during the fourth quarter with the help of a strong export market. In addition, domestic sales orders for polyethylene have picked up in the first quarter for the industry as well. PVC resin and PVC pipe sales volumes have also rebounded in January from the low levels in the fourth quarter, although margins have not improved much.

The industry has announced two price increases for polyethylene for the first quarter 2007 implementation; a $0.06 per pound increase and a $0.07 per pound increase. The industry has also announced a PVC resin price increase of $0.03 per pound. We cannot say with certainty at this time whether any of these announced price increases will be implemented or what impact it will have on the year, but we do remain optimistic. Unfortunately, even so, we will only see a partial impact in the first quarter.

In summary, we had a very strong year in spite of the difficulties experienced in the fourth quarter. We still believe that a US and global economies will continue to enjoy reasonable growth and thus we remain cautiously optimistic about our prospects for our business in 2007. Thank you, very much.

Now, let me turn it back over to Steve Bender.

Thank you, Albert. Before we begin taking questions, I would like to remind you that a replay of this teleconference will be available starting one hour after we conclude the call. We will provide that number again at the end of the call. Operator?

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Kevin McCarthy with Banc of America Securities. Please proceed.

Yes, good morning. Albert, would you comment on the level of PVC inventory in the system, both among producers and downstream among your customers and then also comment on PVC pipe specifically if you would.

We believe the -- our customers have been restocking both PVC resin as well as PVC pipe in their inventory system. I think the producers may have built up a bit of resin at the end of the year. I think at a reasonable level and I think those capacities or those inventories have been reduced from the upturns we are seeing, volume wise, in both PVC resin and PVC pipe in the industry.

Obviously January is a seasonally slow time of year, but relative to what you would normally expect, how would you characterize PVC volumes in January?

Well, I think PVC volumes from leading industry reports have improved because as we mentioned the industry has announced a price increase of $0.03 a pound and, when customers' inventories, whether PVC resin or PVC pipe, has been depleted to a very low level, they would generally tend to build some inventory back to a more reasonable level.

Okay. And then, shifting gears if I may to the olefins side of the company, you mentioned you were exporting polyethylene, can you talk a little bit about the percentage of your production that was exported, which export markets you targeted, and whether those international trade opportunities remain available to Westlake here in the first quarter.

Yes, I think the industry had a record export month in December. As you know, both ethylene spot prices and polyethylene local prices in both Asia and Europe are higher than that of the US. So US has a lower spot ethylene price and polyethylene price in the world today. The industry in the US has been exporting fair amount of products. I think Westlake export, I believe as a percentage, less than industry average and so long as the overseas markets, the prices are higher than the US, you will continue to see exports from the US.

Okay. Thank you very much. I'll get back in the queue.

You're welcome.

Your next question comes from the line of Bill Young with Credit Suisse. Please proceed.

Morning, Albert.

Morning, Bill.

Danny. A couple questions here. PVC volumes have improved, like you said, in January. How do they compare to last year's January and when do you see monthly volume, say catching up to what they were in the prior year?

Well, as you recall, in '06 it was recovering from very low inventory during the fourth quarter of '05.

Right.

Hurricanes Katrina and Rita [showed] inventories of sales were building up gradually. Whereas this year, in 2007, we went down from a very low volume in '06, fourth quarter, so -- but the industry, I would say, is not recovering like it was in the 2006 environment. So we are seeing difficulties both in residential and non-residential construction, as well as it has been a relatively cold winter in the last few weeks at least.

So the various dynamics involved, we're hoping that the weather will get better, and we're hoping that the construction industry will improve better than expected. As you know, there's a lot of discussion of continued weakness in residential construction even though non-residential construction is doing pretty well.

When you look at your PVC resin and pipe and other fabricated products, roughly speaking, how much of your sales there would be exposed to new residential construction?

Well, about 20% of our PVC pipe sales are into the residential area. Most of our pipe are going to large diameter water -- underground water and sewer, and -- which also goes to residential and non-residential developments as well as replacement of aging infrastructure, which is a big part now of the demand for pipe.

In terms of our profiles, our windows business, about 50% of those are going to refurbishment market rather than new home construction, so they would have some impact certainly by the residential slow down.

Okay, that's a great answer. And, last but not least, could you give us a little bit more detail on the timing of the progress for Trinidad, how soon do you think the feasibility study can be completed and give us a rough guess as to -- assuming things go well, when construction might begin.

Yes, as I mentioned earlier, the progress [was] working with the government of the Republic of Trinidad, Tobago are going well. We -- as we mentioned last year when we announced the project in April of last year, we're hoping for a decision on the feasibility study by end of last year. As you know, in most projects, things get more complex and delay [comes in].

So we're hoping that some time this year we'll have a decision on that. I think construction can only begin after decision is made and after our financing -- project financing is well on its way of finalized.

Okay, great. Thank you.

Welcome.

Your next question comes from the line of Edlain Rodriguez with Goldman Sachs. Please proceed.

Good morning, Albert.

Good morning.

Quick question. Can you quantify the impact of having Eastman's polyethylene business in the portfolio in December, in what turned out to be a very challenging year for the industry?

Yes, I think the impact in December should be very small. As you know, December -- fourth quarter and December was very slow months for polyethylene business as well. We -- so I will not count it as the, any material impact.

Okay. One quick question on PVC also. Knowing what you know about the marketplace, when do you expect to see a turnaround in the industry?

Well, we have been reading various publications, people talking about the seasonal upturns should occur in second quarter and people talk about the housing industry should improve in the second half of this year, but some people say it may have to see 2008 before the total market for housing improves.

But in our business, as I mentioned, the housing residential is a smaller part of the business. You do have commercial and other infrastructure construction. So I think the health of the economy probably has more impact than just housing alone, even though housing would have impact as well.

Okay. And one last quick question on taxes. What should we be forecasting for 2007?

Edlain, let's go with 36%.

Okay. Thank you.

Your next question comes from the line of Mike Judd with Greenwich Consulting. Please proceed.

Hi. Good morning. It looks like there was a pretty significant increase in inventories on your balance sheet at year-end, at least compared to last year. Can you talk about -- what are -- what are sort of the -- what's a normal inventory level for the end of the year? Does it really even matter at this point since we're into February? And what are the implications, at least going forward into the first quarter, based on that, please?

Mike, this is Danny. The inventory's up because of the Longview transaction. If you remember, the working capital was $80 million, virtually all of that is inventory. So, since we closed at the end of November and you've only got one month, we didn't pick up hardly any receivables. So inventory is up because of Longview.

Okay. And then secondly, we've heard from a number of other producers who are their -- one way or another, either suppliers to companies like yours or involved in similar business mixes, and what I've heard is that there was a pick up in PVC demand in January, sort of a restocking to get back to -- this is on the part of your customers -- to get to a little bit more of a normalized level.

But my understanding is that is sort of finished at this point in February and we're seeing another slow down in terms of customer orders. Is that why you're somewhat hesitant about that $0.03 price increase?

We were not hesitant about the $0.03 price increase. We did not say -- we mentioned is that it went into effect [things are run] in February, the impact will be only partial, any price increase we have both in polyethylene and PVC for the full quarter impact. I think that the weather definitely has something to do with it in terms of transportation and installations and all that, so that's normal for this time of year.

Okay. And when would you expect to see a pick up there? Are we going to have to wait until maybe April, or so? When do you think -- I guess it will be weather dependent? But actually the weather is supposed to increase to above normalized levels on the east coast this week.

That's good.

Okay. So your thought processes are that that demand will start picking up soon then?

I think certainly, as you mentioned, residential housing construction would have impact on PVC in general. But the seasonal factors say winter -- when there's bad weather periods, it will have an impact on transportation and demand in construction. As the weather improves, the demand will come back. Whether it comes back to last year's level, all that depending on really the overall economy and various segments' growth.

Okay. And then you also talked about the need to integrate Eastman's assets with yours, and you talked about -- it sounded to me that it was going to be quite an endeavor.

Is there anything else that you could tell us? Are there any particular issues that we need to be thinking about as the year progresses along those lines?

Maybe we're just being too cautious saying it's a challenge. As you know, Eastman is 1.1 billion pounds of products, people we are integrating into our organization, we are working on various assets such as IT, all that. That's what we call a challenge. But the business is going quite well, as you may have heard from our previous discussions. Eastman brings a lot of product breadth to our LDPE [individual] low-density polyethylene. They have many specialty products, which we are working on to integrate into our system with our customers. So that's going quite well.

We're just saying that any business of that size magnitude, we have to work to make sure that we get everything together, and then capitalize on the synergies that we have. That's what we meant.

Okay, and just lastly, as a follow-up to Kevin's questions, I think about exports. I guess recent information indicates that we had to -- just had the Chinese New Year, and that, in fact, volumes are beginning to dry up in the export market now. Is that what you're seeing currently?

I think generally speaking, you are right. We don't export a whole much to Asia or to China, but Chinese market slows down during the Chinese New Year's time, which was last Sunday. And as I mentioned the US domestic business has picked up also, volume-wise, so that's a balance between export -- export is still a small part of the US polyethylene business.

Thanks a lot for the help. Appreciate it.

You're welcome.

Your next question comes from the line of Gregg Goodnight with UBS. Please proceed.

Good morning, Albert and Danny.

Morning.

Good morning, Gregg.

I want to talk about the profitability of the pipe segment, some of the publicly traded companies reported numbers that implied that EBITDA was down by about 60%, EBITDA per pound. Could you comment on what pipe prices are currently doing? What they did in the fourth quarter, and where they're headed as we roll into the New Year here?

Yes, pipe price was very high last year and margin was very high. And as the fourth quarter [enfolds], pipe price dropped as well as PVC price. I think that pipe price has bottomed out as you -- we heard a PVC resin price announcement of $0.03. We believe the pipe prices have also improved from the bottom and the volumes are moving. So today, I think the pipe price margin should be good if you have volume going up.

Okay. Or they should improve perhaps. Because the fourth quarter certainly was the lowest --

Right.

Of course.

I think it's fair to say prices, we believe, are moving up.

Yes. Some of the non-integrated producers downstream, PW Eagle, Lambert and Sessions and all this, there's a lot of M&A activity with respect to those companies. Is that telling us something about expected profitability in the pipe area going forward? Is it -- are you optimistic, or do you think things are going to return to where they had been for years, which is very low profitability in pipe?

Well, I think integration certainly would provide more order to the business, but as to whether it goes back to the old days or new environment depending on the strategy of each company.

Okay. So are you optimistic for margins on piping for this year or next year? Do you think we're going to see more like 2006 margins or 2004 and '05 margins?

Well, hopefully we'll see good margins continue, as you know the pipe business is insulated in a large way from imports, so that is something that has no --- very little impact on pipe. It's really a domestic business and regional business. As you know, pipe can only be shipped for relatively short distance because of the freight cost.

Okay. Last question if I could. Will the modifications you're going to do in your upcoming shutdown complete your feed-flex project totally? Will you be able to start seeing benefits -- total benefits after that completion?

Yes, sir.

Okay. That's all I had. Thank you.

Welcome.

Your next question comes from the line of David Silver with JP Morgan. Please proceed.

Yes, hi. I have a couple of questions I guess, maybe CFO type questions here. But you cited a $10 million FIFO effect in fourth quarter. And I understand it's estimated, but if you were to make a further estimate and maybe allocate it between the segments, would I be correct in assuming that most of that relates to your olefins unit and relatively little to your vinyls?

I'm not going to speculate as to how that ought to be allocated.

Okay. I was wondering if you could give us your thoughts on chlor-alkali trends in the first quarter, so -- you're a merchant seller of caustic soda and a net buyer of chlorine and I was wondering if you could just comment on how you see both halves of the ECU kind of developing in this quarter?

Well --

Net consumer -- I mean we're short chlorine. We run - we ran our chlorine plant at better than industry operating rates in the fourth quarter. Caustic prices have moved down a little bit from where they were but the market's still good. It's still a very profitable business for us.

Yes. I guess I was wondering -- you're a purchaser of chlorine and a seller of caustic soda, so have your caustic soda prices risen? Have your chlorine costs to purchase, have they declined?

Chlorine and caustic both have come down from -- if you go from September to October, I mean the prices have trended down, the contract prices have trended down. But again, I mean we're running our chlorine plant at full rates and we're getting a good price for our caustic, and again, its a very profitable business for us.

Okay. Thanks. If I was to ask Albert about the market in China for PVC with your joint venture there, could you comment maybe on the outlook for the broader market there as a whole to be maybe a larger force in the export market for 2007, or a smaller force? In other words, do you see the pace of capacity expansions there leveling out and the new demand or the demand growth in that market absorbing the recent additions? And could we see stronger export demand from that market for -- as 2007 goes on?

Yes, the Chinese PVC business is primarily based on coal or calcium carbide process which has the more competitive cost position compared with ethylene based PVC. However, it is a high-energy intense usage process as well as a lot of pollution, both from CO2 emissions as well as ashes.

So, there are a lot of announcements being made, not all announcements carried out into fruition. The government also is trying to control the growth of the carbide process. Nevertheless, growth in manufacturing of carbide process PVC has [its] imports China still a net importer from a [inaudible], whether it's PVC, VCM or EDC, but over time that could be displaced.

Okay. And then, last question, just for guidance for 2007. Could you give us a range for where you think depreciation and amortization would settle out?

25, 23 million. We're at 80 -- running 83 million for the year. Longview will add a little bit to it.

Right.

23 --

Per quarter.

Per quarter.

Okay. That's very helpful, thank you.

Your next question comes from the line of Mike Segall with Deutsche Bank Securities. Please proceed.

Thank you. Good morning. I have a couple of questions. Again, just sticking with the large diameter PVC pipe. I think you mentioned that there were some seasonal effects or some weather related impacts. Just in general, do you see the demand for that pipe or that material holding up a little bit better given the replacement cycle for a lot of underground infrastructure versus say the residential construction markets?

Yes, we believe -- excuse me, the wood and sewer and construction infrastructure replacement would perform very well going forward and residential is more cyclical.

Right. Now, in the past quarter now, did those volumes hold up as you expected or was there also a decline in line with just overall PVC consumption?

Yes, there was decline across the board because buyers of high [gross] want to time the purchase, the price going to go down, they will buy less or not buy. When price going to go up they would buy more early than they can to save money.

Right. So, basically your margins didn't really move one way or the other, they basically fell along with the price of the resin.

Yes, we believe so.

Another question, on the styrene monomer outage that you mentioned. Could you give us an estimate of the timing and the cost of that?

We said it would be later on this year, fourth quarter.

Fourth quarter. Okay. And do you have a cost estimate for that, or opportunity cost?

Opportunity costs, I think, will be rather small. It's 30-odd days downtime, and the costs of the styrene margin, we believe, will be relatively small.

So $5 million or less or is it -- or just don't want to --?

Yes, less.

Less. Okay. And last question, you mentioned that you had purchased some higher cost ethylene to feed your downstream units. Has all that material flowed through your P&L?

Yes, on the FIFO basis it will flow through.

So it's gone as of the end of last year?

It should have. All this year. Not January. Last year, not January. Yes.

Okay. So by the end of January it should be gone?

Yes.

Okay, great. That's what I had. Thank you.

Welcome.

Your next question comes from the line of Fritz von Carp with Sage Asset Management. Please proceed.

Yes, that's von Carp. Thanks. Yes, I think my questions been asked and answered. Thank you.

Your next question comes from the line of Alex Mitchell with Scopus Asset Management. Please proceed.

Hi, good morning. I just had a few questions. One is, how is the Lake Charles facility coming up?

It's up, since October.

Okay, but it's back to normal?

Right.

Normal volumes. Okay. And in terms of the Longview accretion, do you want to take a stab at that?

It's your call on what polyethylene prices are going to be and its 1.125 million pounds a year or so, whatever you think that might be.

Okay. I mean estimates are roughly $0.10 a quarter, does that sound reasonable?

Whatever -- again, whatever price you want to assume for polyethylene.

Okay. And were there any trading gains in the fourth quarter?

Very small. We had, we said, almost $19 million in trading gains for the year, but most of that's in the first three quarters. It's only $1 million in the fourth quarter.

Okay. And just finally, as this relates to the vinyl segment, have you seen any pre-selling by Shintec?

Not really. Well, I think they do what they do.

Not -- okay. I just meant in the market. Have you see indications that they're pre-selling their product?

Shintec sells domestically and exports. So they are the largest PVC producer in the US.

Okay, but from their new facility.

We haven't heard anything. They could be, we just haven't heard it in the market.

Okay. And just picking up from what Albert said earlier, can you just talk about -- you said 2007 should be a challenging year, can you just talk a little bit more about that?

I think we said challenging year mainly from integration of Eastman Longview assets into polyethylene business.

Okay.

So, I mean, every year is challenging year because we want to do better.

Right. But is there a point during 2007 when those assets will have been pretty well integrated?

Oh, no. I think —- I don't know if you heard my comments to earlier questions. I think the integration or the business going on quite well. It's just a lot of -- maybe we're just too cautious, a lot of the -- like ITs and HRs and systems that we're working to get integrated. And also, we are looking at to maximizing the synergies between the two assets, because they have a lot of products that we don't make, and we try to understand it better. And hopefully, we can capitalize on those technologies and products and customers. So we are saying challenge from that sense. It's our job to hopefully create more value [than] just one plus one equals two.

Okay. Well, thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS]

You have a follow-up question from the line of Kevin McCarthy with Banc of America Securities. Please proceed.

Thank you. Albert, you mentioned that you're now short ethylene monomer following completion of the Eastman deal. Would it be your intent to remain short, say until Trinidad comes up, or should we expect some sort of agreement to achieve a more balanced position?

We are evaluating the alternatives from just keep on buying. We have contracts, buying ethylene, partly from Eastman. Or we can look at --debottleneck our assets, which we've done some that we believe there are more opportunities, and lastly we could acquire also.

That's perhaps a nice segue to my second follow-up question. That was on uses of free cash flow. Even following the Eastman deal, you still have relatively modest financial leverage. And perhaps you could comment on uses of free cash flow in terms of potential dividend increases, acquisition or simply debt reduction.

Yes, our normal uses of free cash flow first goes to CapEx, second goes to acquisition, which was made from Eastman, we comment on both CapEx and acquisition. Thirdly, pay down debt, which we can't pay down any fixed, we don't have any floating debt. And lastly, is paying dividends. So we are doing -- every quarter review those four categories and make dividend policy adjustment accordingly.

Okay. And then finally, I believe you settled the VCM dispute early in the fourth quarter. With the benefit of hindsight now, did that have any material impact on the quarter?

No, we don't believe so.

Okay. Thank you very much.

Thank you.

You also have a follow-up question from the line of Edlain Rodriguez with Goldman Sachs. Please proceed.

Hi, quick question, I might have missed it, on polyethylene price increase. In February what's going on? Is it going to be $0.03 or 0.06 or where are we in the price increases, which have been announced?

It was announced for $0.06 for January and then pushed to February, as you said there's all kinds of talks out there whether it's a full $0.06 or partial. And as you've heard also that the $0.07 announced in the first quarter. So a bunch of price increases announced and every company -- producers and converters are negotiating as to what -- how much increase will happen in February, and how much goes into March.

Okay. Thank you.

Welcome.

At this time the Q&A session has now ended. Are there any closing remarks?

Yes, operator. Thank you so much for participating in today's call. We hope you will join us again for our next conference call to discuss our first quarter results.

Thank you for participating in today's Westlake Chemical Corporation Fourth Quarter Earnings Conference Call. As a reminder, this call will be available for replay beginning an hour after the call has ended, and may be accessed until 1 p.m. Eastern Time on Tuesday, February 27th. The replay can be accessed by calling the following numbers; domestic callers should dial 1-888-286-8010. International callers may access the replay at 617-801-6888. This access -- the access code for both numbers are 14463440.

Thank you for your participation in today's conference. This now concludes the presentation. You may now disconnect, and have a good day.